SME stands for Small and Medium-sized Enterprises. SMEs are businesses that fall within certain size criteria in terms of their annual turnover (in the case of Service companies) or their investment in plant and machinery (in the case of manufacturing companies).
Classification of MSME as per the MSME Ministry is under –
You should invest in SME IPO only if you are willing to take additional risks like
- Higher Price Movements (Volatility) due to smaller businesses and startup companies
- High Illiquidity due to the non – availability of buyers & sellers
- Lot size restrictions – SME IPO are traded after listing in the lot size range of 100 to 10,000 shares. You will require a higher margin amount to trade in SME shares.
NOTE – If you are comfortable locking in your money for longer periods (5+ years) and taking the above risks then only you should look to apply for SME IPOs. Otherwise, you can choose to invest in the upcoming mainboard IPOs.
MSMEs have easy access to capital markets for raising money via a simplified IPO process.
Stock exchanges offer SMEs a lateral entry into the stock market through SME IPOs. First, the SME companies get listed on the SME platform through IPO. 2-3 years later looking at their performance and listing compliances the SME company is migrated to the main exchange without doing a full IPO.
Why do SME Go for an IPO in India
Some common reasons why SMEs opt for IPOs in India are –
- Raising Equity Capital
- Expansion and Growth
- Enhancing Visibility and Credibility
- Exit Strategy for Early Investors
- Mergers and Acquisitions
- Debt Reduction
SME IPO Platforms in India
Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE) have separate SME Exchange platforms that operate independently of the Mainboard platform.
The SME Exchange platforms have lesser compliance requirements compared to the mainboard listing. But, SMEs listing on these exchanges are still subject to various regulatory norms, including providing adequate disclosure and financial information to protect investor interests.
The NSE SME platform is called “NSE EMERGE.” It is a specialized platform by the National Stock Exchange of India (NSE) designed to facilitate the listing and trading of shares of Small and Medium-sized Enterprises (SMEs).
The name “EMERGE” represents the idea of emerging companies getting an opportunity to raise capital from the public and gain visibility in the market.
The BSE SME platform is called “BSE SME Exchange.” It is a specialized platform operated by the Bombay Stock Exchange (BSE) to facilitate the listing and trading of shares of Small and Medium-sized Enterprises (SMEs) in India.
The BSE SME Exchange follows a streamlined listing process with lesser compliance requirements compared to the mainboard of the BSE. This allows SMEs to list and trade their shares on the exchange with relative ease, providing them with enhanced visibility and opportunities for growth.
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What is Mainboard IPO
A Mainboard IPO refers to the process by which a company offers its shares to the public for the first time on the mainboard of BSE & NSE.
The mainboard IPO involves the listing of a company’s shares on the Bombay Stock Exchange (BSE) or the National Stock Exchange of India (NSE), which are the two major stock exchanges in the country.
The mainboard of these stock exchanges is the primary segment where established companies list their shares for trading.
Unlike the SME Exchange (for Small and Medium-sized Enterprises), which has lesser compliance requirements, the mainboard IPO entails stricter regulatory standards and disclosure norms.
Difference Between IPO and SME IPO
SME IPOs (Initial Public Offerings) and Mainboard IPOs are two distinct processes for companies to go public and offer their shares to the public.
They cater to different categories of companies based on their size, financials, and regulatory requirements.
Here are the key differences between SME IPOs and Mainboard IPOs –
#1. Company Size and Stage
SME IPOs are specifically designed for Small and Medium-sized Enterprises (SMEs) that have relatively smaller operations and financials. SMEs seeking to raise capital from the public but do not meet the criteria for a Mainboard IPO can opt for an SME IPO.
In comparison to that, Mainboard IPOs are for larger, more established companies that meet certain criteria regarding their size, financials, and track record. These companies usually have a higher market capitalization and operating scale compared to SMEs.
#2. Regulatory Compliance
SME IPOs have lighter compliance requirements compared to Mainboard IPOs. The listing process on the SME Exchange is streamlined to make it more accessible and cost-effective for SMEs.
Mainboard IPOs are subject to more stringent regulatory compliance, in line with the higher size and scale of the companies involved. These companies are required to meet comprehensive listing and disclosure norms mandated by the Securities and Exchange Board of India (SEBI).
#3. Listing Platform
SME IPOs are listed on dedicated SME platforms, such as the BSE SME platform or NSE EMERGE platform. These platforms are specifically designed for SMEs and provide them with a separate ecosystem to raise capital and trade shares.
Mainboard IPOs are listed on the mainboard of recognized stock exchanges, such as BSE or NSE. The mainboard is the primary segment where well-established companies list their shares for trading.
#4. Investor Base
SME IPOs may attract a different set of investors compared to Mainboard IPOs. The investor base for SME IPOs could include retail investors, high-net-worth individuals, and some institutional investors.
Mainboard IPOs often attract a wider range of institutional investors, including mutual funds, foreign institutional investors (FIIs), and other large financial institutions, in addition to retail investors.
#5. Fundraising Amount
SME IPOs typically raise a smaller amount of capital (usually less than Rs. 200 Cr) compared to Mainboard IPOs. The funds raised through SME IPOs are generally more modest and suitable for the specific growth needs of SMEs.
Mainboard IPOs involve larger fundraising amounts (generally over Rs. 500 Cr) since the companies going public are typically larger and have more extensive operations.
Should You Invest in SME IPO?
Only if you are fine with the associated risk those are-
SME IPOs involve higher risks (price fluctuations) because of less stringent disclosures and profitability requirements. SMEs are small businesses and startup companies with recent business setups. They come with new ideas and technology that may or may not take off in the long term.
Additionally, you will face challenges with liquidity, meaning you may find it harder to buy or sell the stocks just because there won’t be any buyer or seller every time.
The real concern with SME IPOs is that you might get stuck with stocks that are hard to sell if market sentiments change after listing. You may need to hold onto the investment for years, and the amount of money getting blocked will be at least Rs. 100,000.
There is low trading activity in SME stocks after listing. You may find it challenging to sell them when you want. On top of that, there is a lot of size. SME shares allotted in IPO can be traded after listing in the same lot size(which is in the range of 100 – 10,000 shares).
Investing in SME IPOs requires a significant amount of money and comes with limited oversight from market regulators like SEBI.
When you invest in SMEs, you need to understand business cycles, have domain expertise, and be patient to wait for better returns.
SME IPO is for investors having deep pockets to handle any shocks. It’s important to realize that SME IPO investing is different from investing in larger companies (mainboard IPOs) due to the significantly different minimum investment amounts, liquidity after listing, and lot size applicability.
SEBI and the respective stock exchanges impose disclosure requirements and compliance norms on SMEs to protect investor interests.
SMEs need to provide accurate and transparent information in their prospectus to help investors make informed decisions.
SME IPOs carry a higher risk due to lighter disclosure requirements and potentially limited liquidity. Investors should carefully evaluate the company’s financials, growth prospects, and business model before investing.
Retail investors can participate in SME IPOs through their demat and trading accounts with registered stockbrokers. They can apply for shares during the IPO period through various modes like ASBA or online platforms.
After the SME IPO, the company’s shares are listed and start trading on the SME exchange. Investors can buy and sell these shares on the secondary market.
Yes, SME IPOs have the potential to offer attractive returns, especially if the company experiences strong growth and financial performance post-listing. However, it’s essential to remember that all investments carry risks.
Before investing in SME IPOs, investors should carefully read the company’s prospectus and financial statements. It’s also prudent to analyze the company’s business model, competitive landscape, growth prospects, and management team.